South Korean Won: Cautious tightening path expected from BoK – DBS

DBS economists Taimur Baig and Radhika Rao expect the Bank of Korea (BoK) to raise its base rate by 25bps to 3.00% at the August meeting, alongside upgraded Gross Domestic Product (GDP) and Consumer Price Index (CPI) forecasts. They highlight stronger-than-expected first-half growth, persistent core inflation and rising housing prices, but also note a hawkish hold is possible as financial conditions tighten and South Korean Won (KRW) appreciates.

Rate hike with inflation concerns

"We expect the Bank of Korea to raise the base rate by a further 25bps to 3.00% at this meeting, alongside an upgrade to its annual macroeconomic forecasts."

"There is significant room for the BoK to revise up its 2026 GDP growth forecast to around 3.5%, from the current 2.6%, given the stronger-than-expected 1H growth of 3.8% yoy."

"There is also room to revise up its 2027 CPI inflation forecast to close to 3.0%, from the current 2.3%. Although headline CPI moderated slightly to 2.8% yoy in July, from 3.2% in June, core CPI continued to edge up to 2.6% from 2.5%, while housing prices also increased further, to 2.7% from 2.6%."

"These developments should keep the BOK cautious about the risk of inflation remaining above its 2% target for an extended period."

"A hawkish hold at this meeting cannot be ruled out, however. This view mainly reflects the recent tightening in financial market conditions, driven by strong KRW appreciation and heightened KOSPI volatility. The BOK could therefore keep rates unchanged at this meeting while signalling the possibility of a further hike at the October meeting."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)